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Harvey Publishing Company, a small publisher in Columbus, is considering a new book. Typesetting and related costs to prepare for

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Harvey Publishing Company, a small publisher in Columbus, is considering a new book. Typesetting and related costs to prepare for the production are $10,000. It will cost $2 per copy to produce the book. If additional copies are needed at a later time, the set-up cost will be$5,000 and the cost per copy will again be $2. The book will sell for $14 a copy. Royalties, commissions, shipping costs, and so on will be $4 a copy. If the book gets good reviews, it can be expected to sell 5,000 copies a year for 3 years. If it gets bad reviews, sales will be 2000 copies in the first year and will then cease. There is a 0.3 probability of a favorable review. Sally Harvey, president, faces a choice between ordering an immediate production run of 15,000 copies or a production run of 5,000 copies, followed by an additional production runs at the end of the first year if the book is successful. All production runs must be in increments of 5,000 copies. Harvey uses a 10% required return for evaluating new investments. She will pay no taxes because of previous losses and her capital is very limited. Use decision tree analysis to recommend a production schedule and decide whether to publish the book.

Financial Management Questions: Please provide the formula to each calculation, so I will be able to clearly understand how to do similar problems on my own.

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Financial Management Questions:

Please provide the formula to each calculation, so I will be able to clearly understand how to do similar problems on my own.

1.) Calculate the after-tax cost of debt under each of the following conditions:
a. Interest rate, 8%; tax rate 0%.
b. Interest rate, 10%; tax rate 15%
c. Interest rate, 5%; tax rate 20%

2.) Allied Building Products Inc.’s currently outstanding 9% coupon bonds have a yield to maturity of 7%. Allied believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 20%, what is Allied’s after-tax cost of debt?

3.) Golden Flake Snack Food, Inc. can issue perpetual preferred stock at a price of $35.00 a share. The issue is expected to pay a constant annual dividend of $6.00 a share. Ignoring floatation costs, what is the company’s cost of preferred stock?

4.) Billy’s Glass Company Inc. has a beta of 1.2. The yield on a 1-year T-bill is 6% and the yield on a 20 year T-bond is 8.5%. The market risk premium is 6%, but the stock market return in the previous year was 12%. What is the estimated cost of common equity using the CAPM?

5.) ACME Properties, Inc.’ balance sheet shows $100 million in debt, $20 million in preferred stock, and $80 million in total common equity. ACME faces a 30% tax rate and the following data: rd=4%, rps=9%. If ACME has a target capital structure of 40% debt, 5% preferred stock, and 55% common stock, what is ACME’s WACC?

6.) A project has an initial cost of $37,000, expected net cash flows of $10,000 per year for 6 years, and a cost of capital of
11%.
a. What is the project’s payback period?
b. What is the project’s discounted payback period?

7.) Your company is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars):
Year Project M Project N
1 3 12
2 5 6
3 7 2
4 9 1

a. What is the regular payback for each of the projects?
b. What is the discounted payback period for each of the projects?

8.) Yankee Doodle Records, LLC’ sales are expected to increase from $4 million in 2007 to $5 million in 2008. Its assets totaled $2 million at the end of 2007. Yankee Doodle is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2007, current liabilities were $2 million, consisting of $500,000 of accounts payable, $1 million of notes payable, and $500,000 of accruals. The after-tax profit margin if forecasted to be 8% and the forecasted payout ratio is 80%.

a. Use the AFN formula to forecast Yankee Doodle’s additional funds needed for the upcoming year.
b. What would be the additional funds needed if the company’s year-end 2007 assets had been $30 million?
c. Assume that all other numbers are the same. Why is this AFN different from the one you found earlier in question

9.) Certain liability and net worth items generally increase spontaneously with increases in sales. Put a (*) by those items that typically increase spontaneously:

Accounts payable ___________ Notes Payable to banks ___________ Accrued wages ___________
Accrued taxes ___________ Mortgage bonds ___________ Common Stock ___________
Retained earnings ___________

10.) Suppose a firm makes the following policy changes: If the change means that external, non-spontaneous financial requirements (AFN) will increase indicate this by a (+); or if the change indicates a decrease by a (-); and indicate indeterminate or no effect by a (0). For either change think in terms of the immediate, short-run effect on funds requirements.

a. The dividend payout ratio is increased. ( )
b. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment. ( )
c. The firm begins to sell on credit (previously all sales had been on a cash basis). ( )
d. The firm’s profit margin is eroded by increased competition; sales are steady. ( )

2. Ajax Leasing Services has been approached by Gamma Tools to provide lease financing for

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2. Ajax Leasing Services has been approached by Gamma Tools to provide lease financing
for a new automated screw machine. The machine will cost $220,000 and will be leased
by Gamma for five years. Lease payments will be made at the beginning of each year.
Ajax will depreciate the machine on a straight-line basis of $44,000 per year down to a
book salvage value of $0. Actual salvage value is estimated to be $30,000 at the end of five
years. Ajax’s marginal tax rate is 40 percent. Ajax desires to earn a 12 percent after-tax
rate of return on this lease. What are the required annual beginning-of-year lease
payments?

3. The First National Bank of Springer has established a leasing subsidiary. A local firm,
Allied Business Machines, has approached the bank to arrange lease financing for
$10 million in new machinery. Th e economic life of the machinery is estimated to be
20 years. The estimated salvage value at the end of the 20-year period is $0. Allied Business
Machines has indicated a willingness to pay the bank $1 million per year at the end
of each year for 20 years under the terms of a financial lease.

If the bank depreciates the machinery on a straight-line basis over 20 years to a $0
estimated salvage value and has a 40 percent marginal tax rate, what after-tax rate of
return will the bank earn on the lease?

b. In general, what effect would the use of MACRS depreciation by the bank have on the
rate of return it earns from the lease?

5. The following stream of after-tax cash flows are available to you as a potential equity investor
in a leveraged lease:

End of Year Cash Flow (After-Tax) End of Year Cash Flow (After-Tax)
0 $ -50 6 $ 0
1 +30 7 -5
2 +20 8 -10
3 +15 9 -15
4 +10 10 +10
5 +5

The cash flow in year 0 represents the initial equity investment. The positive cash flows
in years 1 to 5 result from the tax shield benefits from accelerated depreciation and
interest deductibility on the nonrecourse debt. The negative cash flows in years 7 to 9 are
indicative of the cash flows generated in a leveraged lease after the earlier-period tax
shields have been used. The positive cash flow occurring in year 10 is the result of the
asset’s salvage value.

a. What problems would you encounter in computing the equity investor’s rate of return
on this investment?

b. If, as a potential equity investor, you require an 8 percent after-tax rate of return on
investments of this type, should you make this investment?

6. The First National Bank of Great Falls is considering a leveraged lease agreement involving
some mining equipment with the Big Sky Mining Corporation. The bank (40 percent
tax bracket) will be the lessor; the mining company, the lessee (0 percent tax bracket);
and a large California pension fund, the lender. Big Sky is seeking $50 million, and the
pension fund has agreed to lend the bank $40 million at 10 percent. The bank has agreed
to repay the pension fund $4 million of principal each year plus interest. (The remaining
balance will be repaid in a balloon payment at the end of the fifth year.) The equipment
will be depreciated on a straight-line basis over a 5-year estimated useful life with no
expected salvage value. Assuming that Big Sky has agreed to annual lease payments of
$10 million, calculate the bank’s initial cash outflow and its first two years of cash
inflows.

7. Drake Paper Company sells on terms of “net 30.” The firm’s variable cost ratio is 0.80.

a. If annual credit sales are $20 million and its accounts receivable average 15 days overdue,
what is Drake’s investment in receivables?

b. Suppose that, as the result of a recession, annual credit sales decline by 10 percent to
$18 million, and customers delay their payments to an average of 25 days past the due
date. What will be Drake’s new level of receivables investment?

8. Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on
terms of “net 120.” Its average collection period is 150 days. The company is considering
the introduction of a 4 percent cash discount if customers pay within 30 days. Such a
change in credit terms is expected to reduce the average collection period to 108 days.
Epstein expects 30 percent of its customers to take the cash discount. Annual credit sales
are $6 million. Epstein’s variable cost ratio is 0.667, and its required pretax return on
receivables investment is 15 percent. The company does not expect its inventory level to
change as a result of the change in credit terms. Determine the following:

a. The funds released by the change in credit terms

b. The net effect on Epstein’s pretax profits

A proposed expansion project is expected to increase sales of JL Ticker’s Store by $35,000 and increase cash expenses by $21,000.

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A proposed expansion project is expected to increase sales of JL Ticker’s Store by $35,000 and increase cash expenses by $21,000. The project will cost $24,000 and be depreciated using straight line depreciation to a zero book value over the 4 yr life of the project. The store has a marginal tax rate of 30%. What is the operating cash flow of the project using the tax shield approach?

a. $5,600
b. $7,800
c. $11,600
d. $13,300
e. $14,600

Calculate the 1.5-year theoretical spot rate if the 6-month spot rate is 1.75 percent and the 1-year spot rate is

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Calculate the 1.5-year theoretical spot rate if the 6-month spot rate is 1.75 percent and the 1-year spot rate is 1.95 percent. The 1.5-year note has a coupon of 3 percent and is selling for $101.3518. (Quotes are in decimals, not 32nds.)

Then based on the data and your calculations, calculate the six-month forward rate 1.0 year from now (1ï?¦2).

Can you help me get started on this assignment? Exercises: 1) For 2006, Treasury bonds with 5-year maturities offered a return about 8.65%; face value of

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Can you help me get started on this assignment?

Exercises:

1) For 2006, Treasury bonds with 5-year maturities offered a return about 8.65%; face value of $1,200; and 7.25% coupon rate. What would be the present value of this bond?

2) Mrs. Smith has 20 common stocks from A&T Global Enterprises. If the A&T Global Enterprises’ board directors believe that the price at the end of the year, these common stocks will rise to $57.80 per common stock and the estimate dividend paid would be $2.15 per common stock, what would be the actual price for each common stock if the expected rate of return is 10.75%?

3) Simon bought a common stock from Monona Air Cleaners Inc. at $35 per share for January 5, 2006 and he expected that the price per share increase by $8 for December 31, 2006. If Monona Air Cleaners will pay $1.75 for dividend per share, what would be the expected rate of return of Simon’s shares?

4) Four Possible Outcomes for Portfolio Return
Outcome Possible Return Probability
Expansion 60% 0.1
Normal 25% 0.5
Recession 5% 0.3
Other -15% 0.1

A) Calculate the following: 1) The Expected Portfolio Return; 2) Variability of Expected Return.

5) Consider the following two-assets:

Expected return Expected risk (σ)
Company X – Japan 10% 12%
Company X – Spain 20% 25%
Correlation coefficient (ρJ-S) 0.45

A) Calculate the portfolio risk (expected return and variability) if you decide invest 35% of your profit in Spain and the other in Japan.
6) By 2005 the rate of return of Treasury bill was 5.25% and market rate of return was 9.75%, with .85 of beta for J&M Warehouse’s common stock. What is the expected rate of return of its common stocks?.
7) Consider the previous exercise and calculate beta if the market rate of return
is 12.25%.